China’s Impending Slowdown Just Means It’s Joining the Big Leagues

China’s era of spectacular economic growth is coming to an end. That’s a popular theme at the moment, with any number of culprits cited — an overleveraged financial system, pollution, too little consumer spending, corruption, anti-corruption campaigns, and of course bad driving. It’s reached the point that the Chinese government’s International Press Center felt compelled to gather a group of reporters in Beijing earlier this week just so that Justin Yifu Lin, the former World Bank chief economist who is now a professor at Peking University and a government adviser, could tell them that he’s “reasonably confident the Chinese government has the ability to maintain a 7.5% to 8% growth rate.”

Here’s the thing: a 7.5% to 8% GDP growth rate already is a significant slowdown from the nearly 10% annual pace at which China’s economy had been growing until last year. And while all the economic issues cited above are real, the big issue confronting the Chinese economy is something simpler and more encouraging. The country is on the cusp of succeeding in its epic quest to break into the ranks of the world’s affluent nations. When that happens, growth tends to slow.

That’s been the finding of economists Barry Eichengreen of UC Berkeley, Donghyun Park of the Asian Development Bank in Manila, and Kwanjo Shin of Korea University in Seoul in two recent studies of growth slowdowns in emerging markets around the world. In the first, published in Asian Economic Papers last year, they reported a marked tendency toward slower economic growth when per capita incomes reach around $17,000 a year (in 2005 prices). In a newer working paper with more-complete data, they revise that to report two inflection points, one in the $10,000-$11,000 range and another around $15,000-$16,0000.

China, with a per capita GDP of $7,827 in 2011 (in 2005 dollars, according to the latest edition of the Penn World Tables), is getting close to that first landmark. It also has a couple of other characteristics that Eichengreen, Park, and Shin have found to be identified with growth slowdowns — an aging population and an economy that has favored investment over consumption. Basically, it’s due. Or, as Eichengreen put it in an email when I asked him about it:

Financial systems, deleveraging, and environment and political problems all differ across countries, but all fast growing, late developing countries slow down once the low hanging fruit has been picked. China can add several percentage points of growth a year by shifting 20 million workers from rural underemployment to urban employment, but once the pool of underemployed labor is drained it’s, well, drained. If you’re a technological latecomer, you can grow fast by importing foreign technology, but once you’ve succeeded in that you have to start investing in and developing your own, which is a harder task.

Remember, these difficulties are the fruits of success. At 7.5% annual growth, China would cross the $10,000 per capita threshhold in 2015, and $15,000 in 2020. Well before then it would pass into the ranks of the world’s “high income” nations, according to the World Bank’s classification.

Not that stuff couldn’t go wrong along the way. Eichengreen and Shin are co-authors (with Dwight H. Perkins, an emeritus professor at Harvard Kennedy School) of the 2012 book From Miracle to Maturity: The Growth of the Korean Economy (no, I haven’t read it, but you of course should), and Eichengreen sees important parallels in the Korean experience:

Korean governments attempted to resist the inevitable slowdown. Their legitimacy derived from delivering growth, and there was the external threat from North Korea that caused them to further prize economic strength. Our estimates there show a break-point in growth potential in 1989. But Korea sought to keep the old growth rates going by boosting investment. That worked for about 7 or 8 years, but no longer. And they ended up with a financial crisis in 1997-8. The Chinese have studied this history too, which is part of the explanation for why they are prepared to accept the current lower growth rate and, not incidentally, are in the process of clamping down on financial excesses.

None of this means there aren’t big risks inherent in such a slowdown for the Chinese government (which, unlike South Korea’s in the late 1980s is showing no signs transitioning towards democracy) and for the global economy (for which a Chinese slowdown will have an impact that earlier slowdowns in Korea and the other Asian tigers did not). But it is important to remember that for an emerging market, slowing down can mean you’ve arrived.

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